Session I Can China Maintain Domestic Stability? What Will Be Its Likely Behavior in the Future? China’s Economy Today and the Challenges It Faces in Shifting to Capitalism Kwan Chi Hung 1. Introduction Ever since China began focusing on domestic reforms and open door policies at the end of the 1970s, it has been achieving an annual average growth rate as high as 9.7%. This growth is not the result of China strictly adhering to the principles of socialism, but conversely because the country has abandoned such principles. It is no exaggeration to say that, as reflected by the growth of private companies and the progress made in privatizing state-owned companies, China has already reached a stage where “it is no longer socialist.” The Chinese government officially describes China’s economy today as being in “the primary stage of socialism.” Since both proletariat and bourgeoisie have been created at the same time, the economy comes closer to the early stage of capitalism; that is, “the stage of primitive capitalism.” There is no doubt that the country’s goal is not an advanced stage of socialism, but a mature (or advanced) stage of capitalism. In fact, the “overall moderately prosperous society” set by the Chinese government as the target of economic development is common to a mature form of capitalism in that it presupposes not only a market economy and private ownership, but also the rule of law instead of rule of men, democracy rather than dictatorship, and systems for correcting the disparities between rich and poor through a redistribution of income. Neglecting to build such institutions might cause China to fall into the trap of crony capitalism. If China shifts from one-party dictatorship by the Communist Party to a more democratic political system, unification with Taiwan will become a reality. Moreover, by using its advantage as a latecomer, the country is projected to continue enjoying higher growth than advanced countries for a prolonged period to come. Considering the strong likelihood of the yuan (renminbi) rising in value in the future against major currencies in line with the rising international competitiveness of Chinese products (just like the yen since the 1970s), China is likely to replace the USA as the world’s biggest economic power before 2050 in terms of gross domestic product (GDP). 21 Kwan Chi Hung 2. From socialism to capitalism In 1978, the Third Plenary Session of the 11th Central Committee of the Chinese Communist Party proposed efforts toward modernization by introducing reforms and open door policies under the leadership of Deng Xiaoping. Since then, more than a quarter of a century has passed. In the meantime, China has maintained its socialist cover, while pushing forward with capitalism. As reflected by the fact that private companies have assumed a leading economic role in place of state-owned companies, the economic realities have increasingly drifted farther away from the authentic principles of socialism. To justify the Communist Party’s one-party rule, new interpretations have been invented to match the circumstances of the times and whenever a new direction for reform was drawn up. Judging from the segmentation of its people into bourgeoisie and proletariat, China should be understood as being not in “the primary stage of socialism” but in “the stage of primitive capitalism.” (1) Whither Socialism? Traditional socialism is based on the three pillars of “income distribution in accordance with labor,” “resource allocation based on planning” and “public ownership centering on state-owned enterprises.” This runs counter to the characteristics of capitalism, which are “income distribution in accordance with production factors such as capital,” “resource allocation based on market principles” and “private ownership.” Unlike Russia, China did not opt to undertake shock therapy and shift to capitalism in a short period of time, but rather decided to take the path of gradual reform, switching the three pillars of socialism with those of capitalism one by one. First, between 1978 and 1992, the government implemented reforms that redistributed authority and profits to lower-level governments and companies. From 1993, it embarked on the introduction of the market mechanism, and the country has now entered the stage of ownership reforms centering upon privatization. During the first stage of reforms between 1978 and 1992, the principle of income distribution in accordance with labor was gradually abandoned. In the agricultural sector, people’s communes were disbanded and a contract system based on household units was introduced. Meanwhile, on the industrial front, authorities began to condone the pursuit of profit. The Chinese economy was invigorated as each economic entity began to pursue profit for its own sake. However, at this stage, state-owned enterprises and economic planning were still the leading players of the Chinese economy, and market forces, not to mention private ownership of property, were only tolerated as necessary evils. After Deng Xiaoping’s speech during his tour of southern China in 1992, the formation 22 China’s Economy Today and the Challenges It Faces in Shifting to Capitalism of socialist market economics was designated as a national goal at the 14th National Congress of the Chinese Communist Party held in the same year. Under a market-oriented environment, privately-owned firms grew rapidly, but many state-owned enterprises became unable to bear the intensifying competition, and their operations are continuing to slide. The problem of nonperforming loans at state-owned banks which extended loans to these firms was also worsening. The low efficiency of state-owned companies is common to all countries, and China is no exception. In fact, since the reforms and open door policies were instituted, economic growth tends to be lower in regions having a higher share of state-owned companies (see Figure 1). For instance, the three Northeastern Provinces (of Heilongjiang, Jilin, and Liaoning) have higher shares of state-owned companies than other regions, and thus fall short of the national average in terms of economic growth. In contrast, Guangdong province (home to many foreign-owned enterprises) and Zheijiang province (where private companies are becoming active) are the fastest growing provinces in China. Fig. 1 Growth in GDP of selected provinces in inverse proportion to the percentage of state-owned companies (%) 16 浙江Zheijiang Guangdong広東 14 吉林Jilin 12 10 8 Liaoning遼寧 6 Heilongjiang黒龍江 4 GDP平均成長率(1979-2003年) 2 GDP average growth average growth GDP (1979-2003) 0 0 20406080100(%) Percentage工業生産に占める国有企業の割合（2003年） of state-owned companies in industrial production (2003) Source: Compiled based on respective year editions of the Chinese Statistics Yearbook As it became clear that the red ink at state-owned enterprises and the nonperforming loans would in the end become a burden on government finances and that private companies were far better than state-owned enterprises in terms of productivity and earnings, the 23 Kwan Chi Hung authorities could not help but condone privatization. The privatization process that began with small and medium-sized firms spread to large companies under the principle of “the strategic realignment of the state-owned economy” presented at the 15th Party Congress of 1997. In order to accelerate privatization, under the “Decision on Issues Regarding the Improvement of the Socialist Market Economic System” adopted at the Third Plenary Session of the 16th Central Committee in October 2003, it was decided that public ownership through a shareholding system should take the place of state-owned enterprises as the mainstay of the economy. “Shareholding” in this sense signifies a mixed ownership that absorbs state-owned capital, collective capital and private capital. Depending on the circumstances, the role of state-owned capital in these shareholding firms may take the form of absolute shareholding or relative shareholding. As a result of this breaking away from traditional ideology, we are likely to see more capital participation in state-owned enterprises by foreign companies and private companies. While the “Decision” still maintains the wording “keeping public ownership as the mainstay of the economy,” by expanding the definition of public ownership, the leaders have kept the pretext of socialism intact while embracing the substance of capitalism. Depending on interpretation, the shareholding system, which has been given the status of main form of public ownership, can include purely private firms such as the publicly-listed companies in capitalist countries. If the traditional definition is followed, it is not an exaggeration to say that China is no longer in a stage of socialism. However, under the new definition, one could even go so far as to say that not only China but capitalist countries such as the United States and Japan are also socialist nations that maintain “public ownership as the mainstay” of their economies. As if to signify the spread of capitalism, China now consists of various classes. “A Study Report on the Stratums of Chinese Society Today” compiled by the Institute of Sociology of the Chinese Academy of Social Sciences (edited by Lu Xueyi, Social Sciences Literature Publishing, 2002) covered a series of analyses conducted based on the ownership status of “organizational resources (political resources), economic resources, and cultural resources,” and concluded that Chinese society consists of ten social strata and five social rankings. The ten social strata are classified as: (1) state and social leaders (2.1% of the total), (2) high and middle corporate executives (1.5%), (3) private entrepreneurs (0.6%), (4) technical professionals (5.1%), (5) clerical workers (4.8%), (6) private business owners (4.2%), (7) tertiary industry workers (12.0%), (8) industrial workers (22.6%), (9) farmers (44.0%), and (10) unemployed or partially employed people (3.1%). The five social rankings are referred to as the top, medium top, medium middle, medium lower, and bottom layers.